Universal Health Realty Income Trust: 2017 Form 10-K Summary
Business Context and Reporting Period
Universal Health Realty Income Trust is a Maryland REIT that owns and leases healthcare and human-service properties. For the year ended December 31, 2017, its portfolio included 68 investments in 20 states: six hospitals, 54 medical office buildings, four free-standing emergency departments and four preschool and childcare centers. The Trust operates as a single reportable segment.
UHS of Delaware, a subsidiary of Universal Health Services, Inc. (UHS), serves as the Trust’s advisor, and all Trust officers are UHS employees. UHS subsidiaries leased three acute-care hospitals and other properties. The Trust had no salaried employees as of December 31, 2017.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $72.3 million | $67.1 million | +7.9% |
| Net income | $45.6 million | $17.2 million | +$28.4 million |
| Basic and diluted EPS | $3.35 | $1.28 | +$2.07 |
| Funds from operations | $42.2 million | $41.6 million | +1.6% |
| FFO per diluted share | $3.10 | $3.09 | +0.3% |
| Cash flow from operating activities | $46.0 million | $40.7 million | +$5.3 million |
| Dividends paid | $36.1 million | $35.1 million | +$0.9 million |
| Net real estate investments | $446.4 million | $447.2 million | -$0.8 million |
| Total assets | $490.0 million | $524.8 million | -$34.7 million |
| Total indebtedness | $256.4 million | $315.7 million | -$59.3 million |
Reported net income margin was approximately 63%, but it was materially affected by a $27.2 million gain on the Arlington transaction and $2.0 million of hurricane insurance proceeds in excess of damaged-property write-downs. FFO, which excludes these items and other non-cash real-estate effects, was approximately $3.10 per diluted share.
Revenue consisted primarily of base rent, bonus rent and tenant reimbursements. UHS-related facilities generated approximately $22.8 million of 2017 revenue, including $16.9 million of base rent, $4.9 million of bonus rent and $1.0 million of reimbursements. Lease payments from UHS represented approximately 32% of consolidated revenue, while the McAllen Medical Center lease alone represented approximately 10%.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $3.4 million at December 31, 2017.
- The $250 million revolving credit facility had $181.1 million outstanding, $1.5 million of letters of credit and $67.4 million of available capacity at year-end. The facility matures in March 2019, with a one-year extension option.
- Consolidated non-recourse mortgage debt was $75.4 million, down from $114.2 million at year-end 2016. Total consolidated debt repayments scheduled for 2018 were $23.3 million, and 2019 maturities included $181.1 million under the revolving credit facility.
- At year-end, total leverage was 41.2%, secured leverage was 11.7%, unencumbered leverage was 37.7% and fixed-charge coverage was 3.8x; the Trust reported compliance with all credit-facility covenants.
- Management stated that operating cash flow, cash, available credit and access to capital markets should be sufficient for operating, investing, financing and REIT distribution requirements over the next 12 months, although future financing terms and availability are not assured.
- Each 1% change in interest rates was estimated to affect annual net income by approximately $1.3 million, after giving effect to interest-rate caps.
Material Changes Versus the Prior Comparable Period
- Revenue increased 7.9%, primarily from properties acquired in 2017 and 2016 and growth at other properties.
- Net income increased sharply because of the $27.2 million Arlington transaction gain and $2.0 million of hurricane-related excess insurance recoveries; underlying FFO increased only modestly.
- Investing cash flow shifted from a $74.8 million use in 2016 to a $39.5 million source in 2017, primarily because the Trust received $65.2 million of net proceeds from the St. Mary’s Professional Office Building divestiture.
- The Trust acquired the Health Center at Hamburg MOB and Las Palmas Del Sol Emergency Center for approximately $9.0 million and invested approximately $15.3 million in real-estate additions, including the Henderson Medical Plaza.
- The Trust repaid $61.0 million of mortgage debt, including $58.5 million of mortgages refinanced or repaid using the revolving facility, and reduced revolving borrowings by $20.5 million.
- 2017 dividends increased to $2.64 per share from $2.60 per share. The 2017 distribution consisted of $1.47 per share of ordinary income and $1.17 per share of capital gain.
- Medical-office-building lease renewals executed in 2017 represented approximately 10% of rentable square feet; renewal rental rates decreased approximately 3% from expired leases, and tenant-improvement costs averaged approximately $10 per square foot.
Guidance, Outlook, Commentary and Unusual Items
- No formal earnings or revenue guidance was provided. Management expects to fund capital expenditures, acquisitions and dividends through operating cash flow, available credit, mortgage financing, equity issuance and other long-term debt as appropriate.
- The Trust renewed its UHS advisory agreement for 2018 at the same terms, including a 0.70% advisory fee on average invested real-estate assets. No incentive fee was earned in 2017, 2016 or 2015.
- Hurricane Harvey damaged and closed five Houston-area MOBs. The Trust recorded $5.0 million of hurricane-related expenses and approximately $7.0 million of insurance recoveries in 2017. The properties were expected to remain closed through most of the second quarter of 2018, but the timing and amount of additional repairs and insurance recoveries remained uncertain. Lost revenue through year-end was approximately $510,000.
- UHS hospital leases expire in December 2021, and the Deaconess rehabilitation-hospital lease expires in May 2019. UHS has renewal, purchase and rights-of-first-refusal provisions on certain properties. Nonrenewal or property purchases by UHS could reduce future rental revenue.
- The Trust’s principal risks include dependence on UHS, healthcare reimbursement and regulatory changes, tenant defaults or bankruptcies, competition, interest rates, access to capital, lease rollover, property damage, insurance recoveries, REIT qualification and conflicts of interest involving the UHS advisor.
- The Tax Cuts and Jobs Act of 2017 was not expected to have a significant direct impact, but management noted potentially material indirect effects on tenants, jurisdictions and REIT investments.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective at December 31, 2017.
Most Important Facts for Investors to Verify
- Refinancing or repayment plans for the $181.1 million revolving-credit balance maturing in March 2019 and the mortgage maturities in 2018.
- UHS’s ability and willingness to renew or purchase the three acute-care hospitals and other UHS-leased properties, particularly as the major hospital leases approach 2021 expiration.
- Underlying recurring FFO and cash available for distribution excluding the Arlington gain and hurricane-related items.
- Final repair costs, reopening dates and additional insurance recoveries related to Hurricane Harvey.
- Occupancy, renewal rates and market rents for MOBs, especially properties with significant 2018–2021 lease expirations.
- UHS’s financial condition, regulatory matters, litigation and healthcare reimbursement exposure because UHS generated approximately 32% of 2017 consolidated revenue and provides the Trust’s advisory services.
- Whether operating cash flow remains sufficient to fund dividends, capital expenditures and debt service without relying on asset sales, equity issuance or additional borrowings.